Question

Sunshine Company is a calendar year accrual-basis taxpayer and is in its first year of operations. Sunshine Company had the following income, expense, and loss items for the current year:

Sales	$650,000
Corporate dividend (from 5% owned corporation)	60,000
Municipal bond interest	25,000
Long-term capital gain	0
Short-term capital loss	(8,000)
Cost of goods sold	320,000
Depreciation	65,000
Nondeductible fines	4,000
Advertising	7,000
Utilities	6,000
Rent	5,000

Furthermore, Sunshine’s liabilities (all recourse) increased from $0 on 1/1 to $300,000 on 12/31 of the current year.

Note: Take into consideration how Capital losses are treated for C corporations. Notice how Interest from municipal bonds affect or not your taxable income.

Special deductions may be necessary for dividends.

1. Assume that Sunshine Company is a c corporation. Alvin contributed $60,000 to purchase 60% of the stock while his wife’s best friend, Ann, contributed $40,000 to purchase the remaining 40% of the stock when the corporation was formed this year. Alvin received a $2,400 per month salary ($28,800 in total). Ann doesn’t work for the company so she received no salary. The company distributed some profits at the end of the year by paying out a $55,000 dividend.
   1. Calculate Sunshine Corporation’s taxable income and income tax liability to be reported on Form 1120.
   2. What amount and type of income must Alvin report on his individual Form 1040 tax return?
   3. What amount of Alvin’s income will be subject to self-employment tax?
   4. What is Alvin’s basis in his Sunshine stock at the end of this year?

Note that you do not need to complete Form 1120, but this form and related schedules will be a useful guide in completing this portion of the assignment.

IMPORTANT - All information is provided, form 1120 is a tool that might help you solve the problem. The related schedules that are linked to form 1120 are useful as well, but not entirely necessary to solve the exercise. Form 1120 can be found on IRS official site.

Answer 1

Business Income:
Gross receipts or sales	$650,000
Cost of goods sold	$320,000
Gross profit.	$330,000
Advertising	$      7,000
Utilities	$      6,000
Rent	$      5,000
Profit before interest	$312,000
Depreciation	$    65,000
Interest expense	$    25,000
Profit before tax	$222,000
Dividend	60,000
Taxable Income	$282,000
Income Tax Liability @ 21%	$59,220

b. Alvin must show the following income received from Sunshine Corporation :

Salary income = $ 28,800
Dividend Income = $ 33,000 (since he holds 60% of the stock in the company, he will receive 60% of the total dividend distributed of $55,000)

c. Alvin will be subject to self-employment tax. $0

Taxed as salary and as qualified dividend.

d. Company's profit after tax = $ (282,000 - 59220) = $ 222,780

Alvin's share = 60% of $ 222,780 = $133,668

Thus, Alvin's total basis in stock = (60,000+133,668) = $ 193,668